Banking crisis: Councils 'ignored warnings over Icelandic banks'

Councils ignored signs of the growing dangers of investing in Iceland’s banks
and put millions of pounds of taxpayers’ money at risk, it has been alleged.

By James Kirkup and Christopher Hope

8:16PM BST 09 Oct 2008

Local government leaders have argued that councils could not have foreseen the risks involved in the Icelandic financial sector when they invested public money.

But The Daily Telegraph has established that some local government managers did act on warnings from international credit ratings agencies that the Icelandic banks were becoming less secure.

In February, Moody’s Investors Service cut its ratings on all the major Icelandic banks. Landsbanki’s long-term rating was downgraded “in light of the weaker credit environment.”

In May, Fitch, another agency, cut the ratings of Glitnir Bank and Kaupthing Bank. Standard & Poors said it had only rated one Icelandic bank, Glitnir, and had cut its rating from A- to BBB+ in April.

Martin Winn, a spokesman for the agency said: “We have been highlighting a growing risk about the Icelandic banking system since February 2007. The rating BBB+ is very high risk for a Western European bank.”

Those warnings were passed on to many local council financial managers, prompting some to stop investing in Iceland.

More than 250 local authorities employ Sector Treasury Services to act as financial advisers. Sector, which is owned by Capita, is understood to have passed on the warnings about the Icelandic banks’ prospects to clients earlier this year.

In June, fund managers looking after investments for the South Yorkshire police and fire authorities stopped investing in Icelandic banks, judging it too risky after being advised of the downgrade by Sector.

Butlers, another advisory service, is also understood to have passed on information about the downgrades to its clients. Sector and Butlers said advice to clients was confidential.

Some of the councils with money trapped in Iceland realised the danger but could not withdraw their money, having made fixed-term investments well before the first signs of trouble appeared.

Michael Gosling, Surrey County Council’s executive member for resources, said the council had £10 million deposited at each of the banks, Glitnir and Landsbanki.

He said: “We attempted to remove our investment prior to the current situation. However as we were tied into a deposit period of up to two years, we were unable to do so.”

Other councils opted to put money into Icelandic banks even after the agencies cut the banks’ ratings. Great Yarmouth Borough Council invested £2million with Heritable Bank as recently as July.

Mark Wallace, campaign director of the TaxPayers’ Alliance, said: “There have been loud warnings about Icelandic banks for months now, so it’s shocking that so many councils simply ignored them.”

The collapse of the Bank of Credit and Commerce International is the ultimate source of today’s rules covering what councils should do with the millions of pounds they routinely hold.

When BCCI went under in 1991, it nearly took a small Scottish council with it.

The $12 billion London-based bank had links to South American drug lords, international money launders and arms dealers.

For reasons that have never been properly explained, officials at the Western Isles council sank almost £24 million – around half their budget – into BCCI.

The Government was forced to arrange an exceptional £30 million loan to the Western Isles, repayable with interest over 30 years.